Is There Really a Debt Crisis?

One of the most debated topics today concerns the level of debt as it concerns
consumers, corporations and governments. Government debt has commanded a particularly
large share of the limelight in recent weeks. Among those who are concerned
that debt levels have reached "crisis" proportions, there's seems to be a consensus
that the debt balloon has reached well night the bursting point, and further,
we have reached the point of no return when it comes to the servicing of the
debt.

In this installment we'll examine the issue of debt and will address the particular
issue of whether in fact we've reached the "point of no return" in terms of
being able to pay off the debt. From the standpoint of arithmetic, one could
easily construct a one-sided case against today's high levels ever being paid
off. The mathematical approach, however, is too narrowly hyper-literal to be
admitted to any reasonable assessment of the debt situation. For a true picture
of how the present debt problem is likely to end, we must consult the history
books. One would be hard pressed in surveying history to find a single instance
of an empire or great nation that ever completely extinguished its debt in
the honest sense of the word. Indeed, most debt is ultimately serviced through
either one of two ways. Regardless of the chosen path, debt is always eventually "serviced," as
we shall see.

The mainstream media has had an extended field day in stoking the public's
fear over the debt "crisis." At some point a few years ago, the media gatekeepers
decided that debt levels were "too high" and that something must be done to
combat this problem before it carried everyone away to economic perdition.
Specifically, we're told that existing debt must be completely amortized before
America can see anything in the way of economic recovery. Like most of the
ideas propagated by the mainstream press, this is a fallacy.

Another fallacy that enjoys currency is that today's must be extinguished,
else the burden upon posterity will prove to be crushing. In his classic treatment
of the pathological aspects of debt, Freeman Tilden ably answered the question, "Does
posterity pay for our debts?" Presenting the question as a syllogism, he wrote:

1. We are posterity.
2. We do not pay.
∴ Posterity does not pay.

"It is obvious that we, the present generation, are somebody's posterity.
Our progenitors left us a rather burdensome debt, a public debt composed of
national, state, country and municipal obligations," wrote Tilden in "A World
in Debt." "And it is interesting to note that those who create great public
debts, on the grounds that posterity will enjoy the fruits of the expenditure,
never thinks it necessary to wait until posterity can exercise its own choice
as to what benefits it prefers to enjoy."

As Tilden said, we are posterity and while we do pay in an extremely limited
way, we clearly don't bear most of the previous generation's burdens. "What
we do," says Tilden, "is to keep the service upon the debts from default --
and this, most fortunately, we are sometimes able to do by reason of the constantly
increasing facilities of modern production, and by modern deftness in the use
of credit in commerce. But, further than that, we are naturally intent upon
spending a little money ourselves....We borrow against the payment by our posterity.
You may be utterly certain that if our posterity are not stopped in some singular
way, they will rely upon their posterity to settle. And so it goes."

Much lip service is given to the "day of reckoning" which looms over the debt-plagued
U.S. like the Sword of Damocles. What most debt alarmists seem not to realize,
though, is that the day of reckoning never arrives. Debt has a peculiar way
of being extinguished without the due fulfillment of the obligations on the
part of debtors. As the French writer Maurice Vion wrote in 1932, "The State,
a debtor of private individuals...is always armed with the prerogatives of
public power. It can, whatever its creditor, call upon the limits of its capacity
of payment, or simply choose not to pay. In the final analysis, the execution
of force [in calling upon the State to pay] has little effectiveness against
the State." [Source: Dettes Politiques et Dettes Commerciales, translation
mine]

As Freeman Tilden wrote in commenting on the government's prerogative of debt
cancellation, "Every government borrowing, therefore, carries with it the political
germ from which a repudiation may more easily develop than in loans to individuals." This
is an extremely important point that seems to be overlooked by debt crisis
commentators.

In his book, "Jubilee on Wall Street," David Knox Barker details the Roman
debt crisis of A.D. 33 as chronicled by Lightner. The crisis began by a series
of money panics attended by a number of runs on Roman banking houses. The crisis
was solved by the emperor Tiberius, who "suspended temporarily the process
of debt and distributed 100 million sesterces from the imperial treasury to
the solvent bankers to be loaned without interest for three years. Following
this action, the panic in Alexandria, Carthage and Corinth quieted." Indeed,
history is rife with instances of the "temporary" suspension of the process
of debt. Debt suspension is in fact one of the primary tools by which debt
crises are alleviated.

Citing the experience of the Roman Empire in attempting to outlaw usury, Tilden
comes to the conclusion that "if a man could have the longevity of Methuselah,
it would pay him to be never out of debt, for he could count on a political
upheaval which would relieve him of his burden every so many years." In the
final analysis, as Tilden concluded, debt will likely never be prohibited and
there will always be "credit crises" followed by debt cancellations in which
the creditor class is mulcted.

If history teaches us any lesson it is that debt levels at any given epoch
are always "too high." The contraction of debts on the part of individuals,
corporations and governments beyond their ability to pay them is an unfortunate
tendency of human nature and will most likely always continue to plague the
human race until the end of time. Even more unfortunate, there will always
be a tendency for the creditor class to continue to loan their capital to unworthy
borrowers (including governments) under the fallacious assumption that others
know best how to return a profit on money that they themselves accumulated
through their superior efforts. In consequence of this, there will always be
the established tendency for debtors of all classes to find ways of not paying
their debts due their creditors.

As Tilden would say, "And so it goes."

Gold Price Trend

Turning our attention to the yellow metal, the gold ETF price was down for
three straight trading sessions this past week before finally bouncing higher
on Friday, June 11. The lack of buying interest was attributed to a diminution
of fear and safe haven buying on the part of investors, particularly as the
euro currency has been rallying of its recent lows. But the trend for the euro
remains down as defined by the relationship of the price to the 15-day moving
average; conversely, the gold price trend remains up. The SPDR Gold Trust ETF
(GLD, 120.01), our proxy for the gold price, remains above its 15-day and 30-day
moving averages (which correspond to the 6-week cycle) and successfully tested
these important trend lines as you can see in the chart here. The uptrend remains
intact for the gold price.

How to Trade the Most Profitable Chart Pattern

One of the most profitable chart patterns is also one that receives virtually
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involves a price breakout (or breakdown) either above or below the outer extremity
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Clif Droke is a recognized authority on moving averages and internal
momentum. He is the editor of the Momentum Strategies Report newsletter,
published since 1997. He has also authored numerous books covering the fields
of economics and financial market analysis. His latest book is Mastering
Moving Averages. For more information visit www.clifdroke.com